A year or two later some of the troubled banks may get out of the sickbed, but there are early signs that they need major shake-ups to get back to the competitive game of lending and attracting deposits.
That the government would ration its Rs 2.1 lakh crore of the promised capital throws up a challenge to a lot of managements of the sick banks on how they would evolve to face the ground realities.
“Capital infusion is not a solution,” says DK Mittal, former secretary at the Department of Financial Services. “The issue is efficiency of running the bank. All three things have to come together — capital, action on the government side on HR reforms, and tough regulations.”
Since the regulator introduced the concept of PCA, a record number of cases have been brought under it in the past 18 months, including one-time giants of Indian banking such as Bank of India, Central Bank of India and IDBI Bank.
IDBI Bank, which was the first port of call of almost all industries in the ’80s and ’90s, tops the chart of sick lenders with its bad loans at 24.98% of total loans. Indian Overseas Bank follows with a gross sticky loans ratio of 22.73%. Interestingly, all the 11 banks brought under PCA by RBI are state-run banks.
The moment these are put under RBI monitoring, they can’t lend big amounts and there is a complete stoppage on extending loans to lower-rated customers. They can’t hire new talent, have to cut costs, and can’t go for branch expansion even if it means additional income. This not only stifles growth but also drives away existing customers. Many say the prescriptions are nothing special and just out of the elementary management school curriculum.
“Measures that RBI suggested when PCA was triggered to revive the banks were no rocket science,” says an executive at a bank under PCA who did not want to be identified. “They spelt out what an MBA student would tell you such as don’t give dividend. A loss-making bank would surely not be in a position to give dividend.”
Birth of PCA
The PCA framework was born in December 2002 after the previous round of bad loans to industries sank Indian banking in the 1990s. Among the various trigger points, capital levels and bad loans were the benchmarks.
The first of several restrictions under PCA is enforced when a bank’s capital falls below 10.25% or net bad loan goes past 6% of total loans. At different stages, different rules regarding hiring, expansion come into force.
Many people have questioned the wisdom of having the PCA trigger point of net NPA at 6% when the regulator itself is aware of the dubious practices adopted by banks, which includes evergreening of loans, circular trading by borrowers where they borrow from one bank to pay another even when their cash flows are squeezed.
But in most of the cases, RBI does not act early and comes hard on the banks only when they breach the highest of the three risk thresholds, such as net NPA of over 12%.
“PCA is linked to trigger points which are too liberal,” says a CEO of a state-run bank who didn’t want to be identified. “It gets triggered when net NPA is at 12%, net loss for two years, capital adequacy is below regulatory requirements. PCA is triggered when the damage is already done.”
The central bank, which regulates, supervises, inspects banks and which has its nominees on the board of banks, falls short of the requirements of modern day banking.
“There is no doubt that there is a failure of banks’ own credit appraisal and there is a failure of the Reserve Bank of India in not cushioning the banks from the supervisory angle,” says Hemindra Hazri, an independent analyst.
Not the panacea
Clamping down on banks’ operations after their financial health has deteriorated may be saving them from drowning in bad loans, but the question is whether the action is too late.
How much was RBI itself responsible for the mess? Deputy Governor Viral Acharya last week delivered a strong message on how the banks should manage their interest rate risks instead of rushing to the regulator for reprieve every time the conditions turned adverse.
He jotted down a to-do list for banks to manage risk which includes conducting stress tests on treasury portfolio and adopt dynamic stop loss limits. But that was not the case before 2015, when Raghuram Rajan as Governor forced the Asset Quality Review.
Whenever banks got into trouble, instead of forcing them to clean up, RBI devised and approved mechanism that helped banks sweep troubles under the carpet.
Turning a blind eye to evergreening of loan accounts, approving the Corporate Debt Restructuring deals that were made on optimistic cash flow assumptions were the order of the day.
“PCA is a fallout of the NPA problem, which, in turn, is a fallout of the huge exposure to infrastructure and related sectors,” says TT Ram Mohan, professor of finance at Indian Institute of Management, Ahmedabad. “It’s a regulatory failure to set norms for concentration risk for banks.”
Of course, every bank has to have its own risk functions. “The risk management committee of the boards of these banks should have stayed well within those limits,” says Ram Mohan.
The way out
Government, the biggest stakeholder in the banking industry, may solve one leg of the problem with its capital. But some believe that this may be like throwing good money after bad without setting things in order.
Human resources and technology play a vital role in a bank’s growth and its sustainability. Many state-run banks have hardly any advanced training programme for staff or very little motivation to equip themselves with latest developments.
If banks have to come out of PCA and have a life of their own, they need highly skilled workforce, technology and, above all, an attitude to reach out to the customer rather than waiting for someone to turn up at the branch.
“Bankers need to bring in accountability and address the gaps in their skill sets,” says former Reserve Bank of India deputy governor KC Chakrabarty.
“The public sector banks suffer from inefficiency because there is no segregation between the promoter and the manager. The government appoints the CEO of a bank and gives directions to them. The regulation is not ownershipneutral unlike global best practices. However, no bank will fail here as the government will bail them out using taxpayers’ money, but this is ultimately costing the economy dear. It would have been better if some banks were allowed to die,” he says.